right-sizing subsidy
Right-Sizing Subsidy ASHON NESBITT
Affordable housing developers need local government subsidy for two reasons: (1) to meet local government contribution requirements for making applications for other funds and (2) to close the gap in financing needed to meet the real costs of the development. How will local governments know what the right amount of subsidy is? Local governments need to provide enough subsidy to make the deal work; they want and need affordable housing developments. However, suppose they over-subsidize the development by providing more funding than the developer needs. In that case, fewer units will be built in their community since that funding could have been used to help an additional development. Right-sizing subsidy means providing not too little and not too much government subsidy for each affordable housing development. For some local governments, the concept of over-subsidizing a development may seem improbable as meager resources are often not enough to fill the ever-growing gap in costs to affordability. However, it is for this very reason it is essential to understand how subsidies, small or large, actively contribute to the viability of a development. The Importance of Subsidy Developers cannot compete for SAIL and competitive tax credits from Florida Housing Finance Corporation without subsidy from local governments. Whether the local contribution is the minimum required to achieve the maximum number of points or the greater amount needed for the local preference for 9% tax credits (Local Government Area of Opportunity Funding), neither of these is the focus of rightsizing. 22
THE FLORIDA HOUSING COALITION | FLHOUSING.ORG
FHFC established the required contribution level, and the local government must provide those funds. Right-sizing subsidy focuses on gap financing, where requests can be for millions of dollars. Local governments must take a deep dive into the costs of development and the income, expense, net operating income, and debt sizing. Identifying the right size of a subsidy requires understanding many factors like development and operating costs, sources of revenue, and construction financing. The developer’s process may start with the costs to build the desired development, followed by creating an operating budget to address income and expenses, hard debt sizing based on those income sources and expenses, and finally, anticipated sources starting with the maximum amount of hard debt. Your review should follow the same process:
